UK business output has jumped to its highest level in two years, according to a closely-watched survey, as the expectation of more interest rate cuts provide optimism for the coming months.
Research by advisory group BDO found that output reached its highest level since July 2022 last month, driven by manufacturing and services.
Its output index rose 2.67 points to 100.77 in July, suggesting growth above historic trends. Above 95 signals growth.
Manufacturing rebounded to 100.03 in July, from a sub-95 reading in June. Services also surpassed the 100 threshold for the first time since August 2022 at 100.87, driven by a surge in new contracts and increased staffing to meet demand at the start of the summer tourism season.
Meanwhile, BDO’s business optimism index came in at more than 100 for the third month in a row, rising by a modest 0.13 points to 102.22 to reach its highest level since the middle of 2022.
The firm said that the sustained growth in confidence reflected easing inflationary pressures and expectations of further interest rate cuts, after the Bank of England lowered borrowing costs for the first time since March 2020 late last month.
Still, BDO’s inflation index posted its third straight month of growth, coming in at 97.76 in July.
The expansion was driven by growth in consumer inflation, with the corresponding index rising to 99.91 – albeit remaining below the year-to-date average of 100.69.
BDO said its inflation index is expected to stay broadly around recent levels in the coming months as deflationary pressures from April’s energy price cut fade away.
Elsewhere, the employment index fell for its 13th straight month in July to 96.33, its lowest level since February 2013. Job vacancies fell by 30,000 in the second quarter amid an increase in unemployment, pointing to a loosening of the labour market.
The Centre for Economics and Business Research forecasts that the unemployment rate will peak at 4.6 per cent in the third quarter before falling at the start of next year. BDO said this could mean a pick-up in the employment index “towards the end of the year, stimulated by interest rate cuts”.
“Sustaining this positive momentum requires further support from the new government, especially around skills, to give businesses access to the talent they need for driving growth long term,” said Kaley Crossthwaite, a partner at BDO.
“Reforming the apprenticeship levy to introduce a more flexible approach will be crucial for the second half of the year, alongside a long-term plan to join young people up with local jobs by working with businesses, local authorities and the education system to connect them with training and apprenticeship opportunities.”